Why carbon prices can’t deliver the 2°C target

After two decades of bluff and lies, the remaining 2°C budget demands revolutionary change to the political and economic hegemony.

This article builds on a lengthy Twitter exchange between Glen Peters (@Peters-Glen), Paul Burke (@PaulBurke_econo) and myself (@KevinClimate); with occasional comments from others, particularly Brent Hoare (@brenthoare). The article below was later picked up by The Independent and a partial version published under the title Plan to use financial markets to halt climate change is ‘doomed’.

Glen and Paul contend that the radical (non-marginal) rates of mitigation necessary for 2°C (i.e. around 10% p.a.) are best delivered through market-based instruments (MBIs) – where a price is placed on each tonne of carbon dioxide emitted. By contrast, I hold that such an approach is doomed to failure and is a dangerous distraction from a comprehensive regulatory and standard based framework (within which price mechanisms may play a niche role).

PB: If we want more or quicker abatement? Just increase the price or tighten the capKA: Hi emitting consumers are effectively inelastic to carbon prices. Lead with regulationsPB: In theory MBIs can achieve large changes in a least-cost wayKA: What Market theory holds for MBIs delivering radical (non-marginal) rates of chance e.g. ~10%p.a.? PB: Pollution pricing is least-cost way to achieve big cuts. The theory holds fully. See textbooks!BH: Standards are useful complementary measure to carbon pricing & MBI’s in achieving abatement?KA: MBIs allow wealthy hi emitters to buy out of major reductions as poor suffer high energy pricesGP: Could adjust for inequalities in many ways, & not obvious this concern applies only to MBIs.GP: “We” promote MBIs as evidence suggests they are most effective means of delivering abatement?GP: Wouldn’t a broad based carbon price take precedence over a patchwork of regulations & altruism?KA: Set standard at level of best technology, tighten ~8%p.a. Avoid picking winners & plan for reboundGP: Individual behaviour & end use regulations are not going to change the energy supply systems, etc.KA: Set standard at ~350gCO2/kWh for suppliers electricity portfolio & 100gCO2/km for new cars.
Tighten standards at ~10%pa & the supply system will changeGP: Policy needs to be environmentally effective, economically efficient, and politically feasiblePB: Can’t get much more certain on emissions outcome than via a capPB: “Tax then relax” seems better option for the moment, both fiscally & for emissions.GP: Use an emissions cap and reduce it at 10%/yr. Take the price you getKA: l could take the price but the 5 million UK households in fuel poverty would really suffer.GP: Are you saying regulations have no costs to the poor and high costs to the rich?GP: A price/cap would seek the low cost options, leading to lower system costs?KA: Most of the world are already low emitters; its us hi emitters that fear any change!KA: Yesterdays paradigm will fail. We need courage to make a paradigm shift

NB. The arguments developed in this article relate directly to a global 2°C characterisation of avoiding dangerous climate change and that this equates with a reduction in emissions from Annex 1 nations of around 10% p.a. – starting now and preferably yesterday.[1]

To start, I disagree with two thirds of the headline framing suggested by Glen Peters that “Policy needs to be environmentally effective, economically efficient, and politically feasible”.

Perhaps at the time of the 1992 Earth Summit, or even at the turn of the millennium, 2°C levels of mitigation could have been achieved through significant evolutionary changes within the political and economic hegemony. But climate change is a cumulative issue!

Now, in 2013, we in high-emitting (post-) industrial nations face a very different prospect. Our ongoing and collective carbon profligacy has squandered any opportunity for the ‘evolutionary change’ afforded by our earlier (and larger) 2°C carbon budget. Today, after two decades of bluff and lies, the remaining 2°C budget demands revolutionary change to the political and economic hegemony. And if that’s too challenging to countenance we should be honest and reject 2°C as either too onerous an endeavour, or acknowledge that we lack the courage to try. However, for this article and our earlier Twitter arguments, 2°C remains an attainable goal (just); and one to which our leaders, with our advice[2], annually commit.

The financial dogma : why price can’t deliver 2°C mitigationReturning to Glen’s framing – we agree policy needs to be “effective”, but I disagree when he suggests responses to 2°C need to be “politically feasible” (within the existing political Zeitgeist). Nor do I agree 2°C policies must be “economically efficient” – at least not within the neoclassical (market) framing of economics and efficiency. Travel back to the Greek framing of economics as oikonomia (broadly ‘stewardship of the household’)– or even perhaps the more recent classical political-economy framing of value – and 2°C policies become more economically viable. But stick with the narrow neoclassical (chrematistic) framing of economic efficiency, or more properly financial efficiency, and 2°C is a non-starter.

Glen, Paul, et al, suggest that a carbon tax, trading scheme or some other form of market based instrument (MBI) would provide the “most efficient” umbrella for delivering 2°C rates of mitigation; i.e. reductions in emissions of ~10% p.a. But, as I understand it, the theoretical foundation underpinning Glen and Paul’s assertion is premised fundamentally on marginal change (i.e. small incremental adjustments) – along with a suite of other market/neoclassical axioms. Market theory does not address large (non-marginal) rates of change; and certainly 10% p.a. fits into the non-marginal category. Paul took exception to this, and when asked specifically about theories demonstrating the efficiency of markets for radical change he pointed me towards standard economic textbooks. However, I could find no such support in the textbooks. Moreover, in lengthy discussions with many economists (of different hues), I have not managed to elicit any appropriate theoretical framing for the ‘efficiency of markets’ and price mechanisms for delivering non-marginal rates of change.

The extrapolation of expressly marginal (market) theory to address non-marginal rates of change has been a long-standing concern of mine. “To draw an analogy, quantum theories are appropriate for understanding Einstein’s photoelectric effect and other small-scale phenomena, but inappropriate for understanding larger Newtonian scale observations. Similarly, it is foolish to rely on marginal market economics as the mainstay for achieving non-marginal reductions in emissions.”[3]

So, and despite ongoing protestations, I disagree with Paul & Glen’s assertions that “theory” and “evidence” lends support to their view that market based instruments (MBIs) are the “most effective” and “least-cost way” of delivering 2°C rates of mitigation.

On a more practical note, if their assertions are valid, then it would be very helpful to have some broad understanding of what the level of carbon price would need to be to deliver an almost immediate 10% p.a. reduction in emissions. I have asked several times for clarification on this, but have yet to receive a clear reply; probably the most illuminating was Glen’s suggestion “use a cap and reduce at 10%/yr. Take the price you get”. This really is the nub of the issue. The price would almost certainly be beyond anything described as marginal (probably many €100s/tonne)[4] – hence the great “efficiency” and “least-cost” benefits claimed for markets would no longer apply. Moreover the equity implications, even within the UK and similarly wealthy Annex 1 nations, would be devastating; but nonetheless would pale into insignificance compared with the impacts on the many millions of deeply poor, disenfranchised and powerless people around the world.

A regulatory and standards framing of 2°C mitigationBuilding again on the Twitter discussion, Glen enquired as to whether I could “estimate the economic costs of a 10%/yr reduction via regulations?” However, in my view, the question belies the problem; it’s almost a category mistake. It risks muddling short term discounted and monetary ‘prices’ that impact the few (i.e. higher emitting people) with long term and potentially infinite non-monetary savings that have impacts for ‘the many’ – including non-humans. Moreover, it holds the marginal value of money as constant for all; supposing that £1 to a university cleaner is the same as £1 to a professor. That said, even within the narrow financial framing of policy I would argue that regulations (within which the price mechanism may play a supporting role) could start to deliver the necessary rates of mitigation at very little, and potentially negative, costs.

For example, considering the same size of fridge-freezer, there is an ~80% reduction in energy consumption between an A++ and an A rated device[5]; i.e. a radical reduction in energy, and hence emissions, with very little price premium. The difference in appliance price typically varies with criteria other than efficiency (does it have a chilled-water dispenser, is it a fashionable retro-design, etc.). Provisional work suggests this broad scale of savings is available across many other appliance categories; most of which have a two to eight year replacement schedule. Similar savings are available for cars; 80g to 100gCO2/km vehicles (with standard internal combustion engines) are already available at no or very little price premium.[6]

Establishing a maximum emission standard for high-energy consuming devices and equipment, set at or around the level of the best commercially available and tightening at 8% to 10% p.a., would radically and rapidly reduce emissions. Moreover, this could be achieved, at least initially, with existing technologies and at little to no additional cost.[7] Given the price of energy, such standards may, in the short-term, deliver net system savings (and therefore require policies to address potential rebound consumption).

I’m fully aware that even this level of regulation would face severe political challenges. No doubt everyone from Jeremy Clarkson, Ferrari and BMW through to the plethora of appliance manufacturers, WTO officials etc. would swing into action attempting to weaken the standards. No one said 2°C would be easy, but, given sufficent political will, suites of appliance standards (expressly not dictating the type of technology) could deliver almost immediate and large reductions at very little cost.

A carbon price can always be paid by the wealthyProfessors, MPs, ministers, business leaders, GPs, barristers, etc. would all be able to absorb a significant proportion of any politically-acceptable carbon price. So we may buy a slightly more efficient 4WD/SUV, cut back a little on our frequent flying, consider having a smaller second home where we may even choose an A+ retro Smeg fridge-freezer (the A++ being a little too ‘modern’ looking) – but overall we’d carry on with our business as usual. Meanwhile the poorer sections of our society (remembering that the mode salary in the UK is around £17k p.a.) would have to cut back still further in heating their inadequately insulated and badly designed rented properties. Their children would perhaps begin to suffer more bronchial problems as their houses become colder and damper; so more trips to the doctor – but the increased price of road fuel makes this more expensive. Perhaps they could cut back on the quality of their food – after all it’s three for the price of two on processed ready meals at the cheapermarket.

No doubt some rebate could be possible – but as carbon prices extend towards the level necessary for 2°C (i.e. 10% p.a.), so the rebates become prohibitive and the vociferous professors and other well educated elites (with support from the Daily Mail) begin to begrudge the increased taxation to cover the rebates.

For 2°C it is difficult to see how price could even begin to deliver the deep and immediate reduction in emissions (i.e. energy consumption in the short-term) necessary from us professors and others in the top 1% to 25% of the income distribution.

So where does this leave 2°C mitigation?Though not yet fully fleshed out, some of us in the Tyndall Centre are beginning to shape a sweeping programme of 2°C emission reductions (a Radical Plan for 2°C). It is true to say such a coordinated and radical framework is not popular with many colleagues, and some major research funders consider it “too ambitious” and not in keeping with the “Government’s 80% by 2050” target. Despite, such academic and funder opposition to an agenda of ‘radical reductions’, others of us consider it worth a punt (See forthcoming Tyndall Centre Conference on “radical emission reductions” at the Royal Society – Dec. 2013)

In essence a 2°C energy agenda requires rapid and deep reductions in energy demand, beginning immediately and continuing for at least two decades. This lengthens the window of opportunity in which to transition to a low carbon energy supply system (almost zero-carbon for 2°C). Nevertheless, and counter to most low-carbon scenarios, if poorer nations are to be ‘given’ a longer period for decarbonisation, a genuinely 2°C energy supply system for the majority of Annex 1 nations would need to be virtually zero-carbon by around 2030; in effect a Marshall plan for energy supply.

Such immediate cuts in energy demand will require around two decades of revolutionary reductions in energy consumption from high-energy users, and a substantial, but evolutionary, reduction from those with more moderate consumption habits.

My headline (and very provisional) framing for the UK, or similar Annex 1 nation, would include a suite of regulatory measures, buttressed where necessary with price mechanisms. In addition it would be important to understand the role of behaviours and practices both in helping frame effective legislation, but also in fostering a deeper civic and institutional engagement with the low-carbon agenda. At the risk of being either shot down for absence of detail or deliberately quoted out of context, a provisional and partial list of low-carbon regulations offers a flavour of what such an iterative decarbonisation agenda may include:

Strict energy/emission standards for appliances with a clear long-term market signal of the amount by which the standards would annually tighten; e.g. 100gCO2/km for all new cars commencing 2015 and reducing at 10% each year through to 2030

Strict energy supply standards; e.g. for electricity 350gCO2/kWh as the mean emissions level of a suppliers’ portfolio of power stations; tightened at ~10% p.a.

A programme of rolling out stringent energy/emission standards for industry equipment

Stringent minimum efficiency standards for all properties for sale or rent

World leading low-energy standards for all new-build houses, offices etc.

Technological and operational standards for shipping operating in UK waters

A suite of iterative mechanisms to counter, or at least alleviate, issues of rebound[9]; this may include price mechanisms, progressive metering tariffs, etc.

Revisit the viability of Personal Carbon Trading as a mechanism for improving societal engagement in non-marginal change

Appoint a senior minister with the principal responsibility for maintaining an equitable transition to a low-carbon society

All this will be dismissed by many as naïve or impossible – but to some extent dismissals should be taken as recommendations for this agenda; at least for a 2°C future. The political and economic hegemony has procrastinated for too long for it to be able to deliver on its own 2°C promises (on its own terms). So in stark contrast with Glen, Paul et al, I take the view that if the solutions (at least collectively) are deemed politically feasible and economically efficient they will, almost by definition, fail. I finish by returning to the closing comments Alice Bows-Larkin and I drafted for our Nature Climate Change commentary – A new paradigm for climate change: (doi:10.1038/nclimate1646)

… At the same time as climate change analyses are being subverted to reconcile them with the orthodoxy of economic growth, neoclassical economics has evidently failed to keep even its own house in order. This failure is not peripheral. It is prolonged, deep rooted and disregards national boundaries, raising profound issues about the structures, values and framing of contemporary society.

A new paradigmThis catastrophic and ongoing failure of market economics and the laissez-faire rhetoric accompanying it (unfettered choice, deregulation and so on) could provide an opportunity to think differently about climate change. Early signs of such a paradigm shift are already evident. As Alan Greenspan, former head of the US Federal Reserve and a pivotal figure in the economic orthodoxy revealed, he was “in a state of shocked disbelief ” at having “discovered a flaw in the [free market] model”.8 This is not just a minor flaw; it undermines a central tenet (self-regulation) of the laissez-faire ethos. It is to market economics what Copernican heliocentrism was to Ptolemaic astronomy.

Reinforcing the view that we may be on the cusp of a paradigm shift are the fundamental disagreements between orthodox economists as to how to respond to the crisis. This theoretical disarray has parallels with those rare occasions in history where established knowledge is superseded by new ways of thinking and understanding. Newton, Darwin, Einstein and Planck all represent such radical transitions. They are seldom achieved easily and the old guard typically hangs on kicking furiously to avoid relinquishing its grip on power. Ultimately, however, such protestations are futile in the face of the new insights and new ways of doing things that emerge with the new paradigm. It is in this rapidly evolving context that the science underpinning climate change is being conducted and its findings communicated. This is an opportunity that should and must be grasped. Liberate the science from the economics, finance and astrology, stand by the conclusions however uncomfortable. But this is still not enough. In an increasingly interconnected world where the whole — the system — is often far removed from the sum of its parts, we need to be less afraid of making academic judgements. Not unsubstantiated opinions and prejudice, but applying a mix of academic rigour, courage and humility to bring new and interdisciplinary insights into the emerging era. Leave the market economists to fight among themselves over the right price of carbon — let them relive their groundhog day if they wish. The world is moving on and we need to have the audacity to think differently and conceive of alternative futures.

Civil society needs scientists to do science free of the constraints of failed economics. It also needs us to guard against playing politics while actively engaging with the processes of developing policy; this is a nuanced but nonetheless crucial distinction.

Ultimately, decisions on how to respond to climate change are the product of many constituencies contributing to the debate. Science is important among these and needs to be communicated clearly, honestly and without fear.